The Foundation for Economic Education

FREEDOM
W

MONEY

Essays by
Leonard E. Read
and

LUDWIG von MlSES

About the Authors

LEONARD READ (1898-1983) founded The foundation
for Economic Education in 1946 and served as its Presi

dent until his death. Mr. Read was a popular lecturer

and seminar leader and the author of more than two
dozen books.

Mr. Read sought a better understanding of freedom and worked to expound it with ever greater clarityand persuasiveness. The methodology he stressed was basedon self-improvement let each person work on himself and present society with one improved unit. "Those Things Called Money" originally appeared in the January 1975 issue of The Freeman. LUDWIG VON MlSES (1881-1973) was the leading member of the Austrian School of economic thought.

He taught at the University of Vienna until 1934, and

in Geneva, Switzerland, until 1940, when he emigrated to the United States, ultimately becoming a U. S.

citizen. He taught at New York University from 1945

until his retirement in 1969. The most outstanding of

his many publications was Human Action, first pub lished in English by Yale University Press in 1949 and
later by Contemporary Books, Inc. "The Gold Problem" originally waspublished in the

June 1965 issue of The Freeman. The edited version which appears hereis from Planning for Freedom (1980) and is reprinted with permission of the publisher,
Libertarian Press.

About the Publisher

The Foundation for Economic Education exists to

serve individuals concerned about freedom. Recogniz

ingthat the real reasons for freedom are grasped only through an understanding of the free market, private property, limited government way of life, The Foun
dation is a first-source institution providing literature and activities presenting this point of view. The Freeman, a monthly study journal of ideas on liberty, has been published by The Foundation since 1956. Its articles and essays offer enduring ideas on

the positive case for human liberty and criticisms of

the failures of collectivism. The Freeman is available
to anyone upon request.

The Foundation for Economic Education, Inc.

Irvington-on-Hudson, New York 10533

FOREWORD
A. key element inachieving economic integrity and
fiscal responsibility is understanding the nature and function of "Those Things Called Money." The use of commodities having market valuefor money denies

the political prerogative of manipulation. Thus in the face of record deficits, unprecedented national debt, and a vacuum of political courage, one approach to reality would be a return to a money of the market place. Only in this way can a free society properly assess and value goods and services, including those proffered by government. The process of change economic, social, and political calls forth our fondest hopes and greatest fears for the future. One reassuring step toward future economic stability would be a return of the medium of exchangemoney to the wisdom of the market. The timelessness of right principles is evidenced again in the essays of this little booklet. The lives of Leonard Read and Ludwig von Mises and the expres sions of their thoughts may bear dates of years gone by, but the truth they articulate is timeless.
Bruce M. Evans

President

THOSE THINGS CALLED MONEY

By Leonard E. Read

1 he comedian Ed Wynn used to say, "What this

country needs is a good five-cent nickel." Nearly everyone at this moment of money madness will agree with Wynn's statement humorous but sound. H. B. Bohn remarked: "Of money, wit, and virtue, believeone-fourth of what you hear." As to wit and virtue, Bohn may be right. But I doubt that as much as a fourth of what we hear about money is worth serious consideration, for most of the pro nouncements stem from a premise that it is a func tion of government to issue money and regulate the value thereof. The premise seems wrong to me. I believe that if money is to be useful to traders as a medium of exchange then the decisions as to what shall serve as money must be worked out by traders in the market, wluntarily, rather than by governmen
tal edict.

If you are further interested in what I believe, reflect

for a moment on the various commodities and other

things that have been used for money: wampum, sea shells, salt, fur, dried fish, ivory, cigarettes, silk stock ings, gold and other metals the list is long. These are some of the things called money, but note that of
those listed thus far, all are commodities that, at the
time, were in common use in trade so common that

they were useful as a medium of exchange. But things of a different category, "noncommodities," also are called money and thereby hangs our tale. German marks are things; in 1923 five

billion of these things wouldn't buy a loaf of bread. Paper dollars also are things called money legal tender government money which the law requires a creditor to accept in payment of a debt. Or to put it another way, government money, if created out of
thin air by edict, is in no sense a scarce and valuable
resource useful to traders but is rather a means of tax-

ing or taking scarce resources from the market without offering anything useful in exchange. Such "money" may be a clever form of taxation, but it is far worse
than useless as a medium of exchange.

Not Worth a Continental?

Am I arguing that government money never has
been "worth a Continental"? Not necessarily. If a

governmentissues paper receipts that are fully backed by some valuable and widely acceptable item of trade fully redeemable upon demand by the bearer such receipts may serve very well as a medium of ex change. But, of course, there's no reason on earth why
the issuance of warehouse receipts should be a govern mental function. Let anyone do it who has a warehouse, and printing press, and a sufficient stock of gold or silver or whatever else the receipt calls for. And let government intervene only to see that the receipts are not fraudulent counterfeit. I am well aware that some governments of some na tions at some times have been in charge of monetary policy with quite satisfactory results, when the policy was to mint standardized coins and issue receipts fully redeemable in some well-known and highly marketable commodity. But there is no reason to suppose that the managers of a governmental monopoly willlong func tion in competitive fashion if the monopoly can be exploited to gain additional political power. And it doesn't take a genius to figure how to exploit a money monopoly: just print bogus warehouse receipts and declare them to be legal tender; then pass laws to penalize suppliers of goods or services who refuse to accept the bogus receipts at face value. Finally, this can be pushed to the point of issuing receipts based not on the fullness of the warehouse but on its empti
ness instead the use of the national debt as the back

ing for the paper money.

What would be the grossest fraud if an individual tried it has become the common practice of govern ments all quite legal because it is a governmental monopoly. And the result is a runaway inflation that disrupts business activities and hinders rather than facilitates trade. This is why governments cannot be trusted with power to determine what traders should use as a medium of exchange. Let the traders choose.
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Leave the decisions about money to the market. Limit

the government to its proper function of policing the market and punishing traders who cheat or rob or willfully injure other peaceful persons.

There Is No Blueprint
When I say that decisions about money should be leftto the market, I do not presume to know precisely
what those decisions might be. Nor do I find much agreement among monetary experts as to what those decisions ought to be. Would traders insist on pure gold as money? Would they use checking accounts or American Express or credit cards? Would they patronize banks and insist on 100 per cent reserves? I don't know, and I'm not terribly concerned that no one elseseems to know precisely. What I am concerned
about is that men be free to choose whatever best

seems to serve their own respective purposes. And I

believe that from such freedom to succeed or fail in

open competition in the market will come the most

nearly perfect and tamper-proof monetary policy

humanly possible.

How much understanding of money is required of us? No more understanding than any one of us has about how to make a jet airplane. To support this point, let me repeat for the ump teenth time that no single person knows how to make an ordinary woodenleadpencil,explained in a brevity entitled, "I, Pencil." Yet, the year that piece was writ ten, wemade in the US.A. 1,600,000,000 woodenpen cils. How come? How explain a know-how that exists in no one of us, even remotely? My answer: It is the
overall wisdom in the free market. When millions of

people are free to act creatively as they choose, an unimaginable wisdom is the consequence, lb assert that it is a billion times greater than exists in any discrete individual would be a gross understatement.

Keep in mind that any single person's understanding of how money could be made to serve us honestly and efficiently is precisely as impossible as understanding how to make a pencil!
It is appropriate at this point to ask a question to
which no one has a correct answer: What would be

the medium-of-exchange situation were it left not to

dictocratic control but to the fantastic wisdom of the

market? To hazard a guess would be to feign a clair voyance beyond human experience. Guessing would be as farfetched asexpecting Socrates to have foreseen and described the makings of present-day air travel, electric lighting, the human voice delivered around
the earth in one-seventh of a second, my dictaphone,

or a thousand and one other phenomena. I call them "phenomena" because no one understands or can

describe the genesis of these countless economic bless ings even after their existence! The wisdom that
accounts for them is not in you or me alone. Why then should we not entrust money the medium of exchange to this same wisdom rather than to the coercive power of those now in public office? Yes, what this country needs is a good five-cent nickel. The way is clear: Relegate organized force government to the defense of life and property, in voking a common justice, keeping the peace. And leave all creative activities, including the medium of exchange money to the wisdom of the market. Do this or our country will end up with a five-cent
thousand-dollar bill.

Difficult? Yes! Impossible? Who knows! One thing

for certain: Turning money affairs over to the free

market is no more an idealistic dream than reducing

government to its properrole. And, another thing for certain: Standing for that which seems politically ex pedient or feasible gains nothing; such techniques are
doomed to failure. On the other hand, every boon to mankind has had its birth in the pursuit and

upholding of what is right. Humanity has been graced with many boons, every one of which was firstthought to be impossible. Bear in mind that righteousness, as well as faith, works miracles. I

THE GOLD PROBLEM

By ludwig von Mises

Why have a monetary system based on gold?

Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power in dependent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called "sound money." The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventureson the part of
governments.

The gold standard did not fail. Governments deliberately sabotaged it, and still go on sabotaging it. But no government is powerful enough to destroy the gold standard so long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world. Governments believe that it is the gold standard's fault alone that their inflationary schemes not only fail to produce the expected benefits, but unavoidably bring about conditions that (also in the eyes of the rulers themselves and most of the people) are con sidered as much worse than the alleged or real evils they were designed to eliminate. Except for the gold standard, governments are told by pseudo-economists that they could make everybody perfectly prosperous. Let us test the three doctrines advanced for the sup port of this fable of government omnipotence.

1. The Fiction of Government

Omnipotence
"The state is God," said Ferdinand Lassalle, the founder of the German socialist movement. As such,

the state has the power to "create" unlimited quan tities of money and thus to make everybody happy. Intrepid and clear-headed people branded such a policy of "creating" money as inflation. The official terminology calls it nowadays "deficit spending." But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in cir culation. Then a greater quantity of money "chases" (as a rather sillybut popular wayof talking about these problems says) a quantity of goods and services that has not been increased. The government's action did not add anything to the available amount of useful things and services. It merely made the prices paid for
them to soar.

Ifthe government wishes to raise the income of some people, for example, government employees, it has to confiscate by taxation a part of some other people's
incomes, and then distribute the amount collected to

its employees or favored groups. Then the taxpayers are forced to restrict their spending, while the reci pients of the higher salariesor benefits are increasing their spending to the same amount. There does not result a conspicuous change in the purchasing power of the monetary unit. But if the government provides the money it wants for the payment of higher salaries by printing it or by granting additional credits, the new money in the
hands of these beneficiaries constitutes on the market

an additional demand for the not-increased quantity of goods and servicesoffered for sale. The unavoidable result is a general tendency of prices to rise. Any attempts the governments and their propaganda
offices make to conceal this concatenation of events are

in vain. Deficit spendingmeansincreasing the quantity of money in circulation. That the official terminology
avoids calling it inflation is of no avail whatever. The government and its chiefs do not have the

powers of the mythical Santa Claus. They cannot spend except by taking out of the pocketsof some peo ple for the benefit of others.

2. The "Cheap-Money" Fallacy

Interest is the difference in the valuation of present goods and future goods; it is the discount in the valua tion of future goods as against that of present goods. Interest cannot be "abolished" as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years. The height of the originary rate of interest, which is the main component of the market rate of interest
as determined on the loan market, reflects the dif

ference in the people's valuation of present and future satisfaction of needs. The disappearance of interest, that is, an interest rate of zero, would mean that peo ple do not care a whit about satisfying any of their present wants and are exclwively intent upon satisfy ing their future wants, their wants of the later years, decades, and centuries to come. People would only save and invest and would not be consuming. On the other hand, if people were to stop saving, that is, stop making any provision for the future, be
it even the future of the tomorrow, and not save at

all and consume all capital goods accumulated by previous generations, the rate of interest would rise
beyond any limits.

It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and the pecuniary interests of the personnel operating the government apparatus of coercion and

compulsion, the much-referred-to "public sector" of the economy. But the government has the power to push the Federal Reserve System, and the banks sub
ject to it, into a policyof cheap money.Then the banks are expandingcredit. Underbiddingthe rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. Thus they are inescapably falsifying the businessmen's estimation of market conditions. Although the sup

plyof capitalgoods(that can only be increased by ad ditional saving) remains unchanged, the illusion of a richer supply of capital is conjured up. Business is in duced to embark upon projects which a sober calcula tion, not misledby the cheap-money ventures, would
have disclosed as malinvestments (over-investment in

capital). The additional quantities of credit inundating the market make prices and wages soar. An artificial

boom, a boom built entirely upon the illusions of ample and easy money, develops. But such a boom cannot last. Sooner or later it must become clear that,

under the illusions created by the credit expansion, business has embarked upon projects for the execu tion of which the real savings are not rich enough.
When this malinvestment becomes visible, the boom collapses.

The depression that follows is the process of li

quidating the errors committed in the excesses of the

artificial boom; it is the return to calm reasoning and

a reasonable conduct of affairs within the limits of the

available supply of capital goods. It is a painful pro

cess, but it is a process of restoration of business health.

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness. If it were really possible to substitute credit expan sion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiencyof their capital equipment. All they would have to do for the improvement of their conditions would be to expand money and credit more and more. No "foreign aid" schemeswould have emerged. But in granting foreign aid to the backward nations, the American govern ment implicitly acknowledges that credit expansion is no real substitute for genuine capital accumulation through saving.

3. The Failure of Minimum Wage

Legislation and of Union
Coercion
The height of wage rates is determined by the con
sumers' appraisal of the value the worker's labor adds
to the value of the article available for sale. As the

immense majority of the consumers are themselves earners of wages and salaries, this means that the deter mination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings

of the movie star and the boxing champion are pro

vided by the welders,street sweepers, and charwomen who attend the performances and matches.

An entrepreneur who would try to pay a hired man

less than the amount this man's work adds to the value

of the product would be priced out of the labormarket by the competition of other entrepreneurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the con sumers are prepared to refund to him in buying the product. If he wereto pay higher wages, he would suf fer losses and would be ejected from the ranks of the
businessmen.

Governments decreeing minimum wage laws above

the level of the market rates restrict the number of

hands that can find jobs. Such governments are pro ducing unemployment of a partof the labor force. The same is true for what is euphemistically called "col lective bargaining."
The only difference between the two methods con

cerns the apparatus enforcing the minimum wage. The government enforces its orders by resorting to policemen and prison guards. The unions "picket." They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individuals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity. Nobody is to day in a positionto disobeyan orderissued by a union. To the employers no other choice is left than to sur render to the dictates of the unions or to go out of
business.

But governments and unions are impotent against economic law. Violence can prevent the employers from hiring help at potential market rates, but it can not force them to employ all those who are anxious to get jobs. The result of the governments' and the unions' meddling with the height of wage rates can not be anything else than an incessant increase in the number of unemployed. It is precisely to prevent this outcome that the government-manipulated banking systems of all Western nations are resorting to inflation. Increasing the quantity of money in circulation and thereby lowering the purchasing power of the monetary unit, they arecutting down the oversized payrolls to a height consonant with the state of the market. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the
10

futile attempts of governments and labor unions to

meddle with the conditions of the labor market. As

soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, govern
ment and unions resume with renewed zeal their ven

tures to raise wage rates above the level at which every job-seeker can find a job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great Society con
firms the fundamental thesis of the true British lovers

of political liberty in the nineteenth century, namely, that there is but one means to improve the material conditions of all of the wage earners, viz., to increase the per-head quota of real capital invested. This result can only be brought about by additional saving and capital accumulation, never by government decrees, labor-union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

4. The Inescapable Consequence, Namely, the United States Government Gold Holdings
Will Shrink
In many parts of the earth an increasing number of people realize that the United States and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the recent decades to conclude that on account of these inflationary policies an ounce of gold will one day become more expensive in terms both of the currency of the United States and of their
own country. They are alarmed and would like to

avoid being victimized by this outcome. Americans were once forbidden to own gold coins
and gold ingots (from 1933 to 1976). Their attempts to protect their financial assets consisted in the

methods that the Germans in the most spectacular inflation that history knows called "Fluent in die Sachwerte" (flight into real values). They invested in common stocks and real estate, and preferred to have debts payable in legal tender money rather than holding claims payable in it. Even in the countries in which people were free to
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buy gold therewere not conspicuous purchases ofgold on the part of financially potent individuals and in
stitutions. The buyersof gold were mostly people with modest incomes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases via the London gold market on the part of such people that reduced the gold holdings of the United States.

There is only one method available to prevent a fur ther reduction of the American gold reserve, namely, radical abandonment of deficit spending as well as of any kind of "easy-money" policy.

12.

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The Foundation for Economic Education

Irvington-on-Hudson, New York 10533